Treasurer
Wayne Swan
will open a new offensive against the opposition by challenging
Joe Hockey
to rule out moves to scrap the four pillars banking policy and enable mega-mergers.

In a speech in Sydney on Wednesday, the Treasurer will also announce an end to government investment in residential mortgage-backed securities, which it started at the height of the 2008 financial crisis to support the tottering mortgage-funding system.

A strong recovery in wholesale funding markets means there is no longer a need for Treasury to provide support to smaller lenders, which have so far this year independently raised $3.9 billion from non-government investors.

Mr Swan will say the growing strength of Australia’s financial system is an “untold story of our economic success" in the five years after the GFC.

He will also home in on speculation that Mr Hockey, the Coalition Treasury spokesman, is planning to revive the prospect of ditching the policy which effectively prevents the big four banks from buying one another.

Mr Hockey has promised to launch a “Son of Wallis" financial services inquiry within 100 days of a Coalition election victory. The four pillars policy is expected to be part of that inquiry.

Mr Swan will say it is a little-known fact that there was growing pressure in the winter of 2008 – during the Rudd government’s early days and before the collapse of Lehman Brothers – for an end to the 20-year-old policy.

“You have to wonder at the motives of those calling for yet another financial system inquiry," Mr Swan will say in Sydney. “Do they carry the baton of those who in 2008 urged me to weaken stability and competition by abolishing the four pillars policy? I wonder."

Related Quotes

Company Profile

Mr Swan will call on Mr Hockey to end doubts over the Coalition’s ongoing support for the policy. “We must have a bipartisan consensus to end speculation that the four pillars policy will be scrapped. It’s not good for the sector and it’s not good for the country."

The challenge to the Coalition will come amid fresh signs of a normalisation in the financial system.

Treasury has urged Mr Swan to stop issuing RMBS after investing some $15.5 billion since 2008. Mr Swan says the Australian Office of Financial Management, which operates the investment, has supported 67 securitisation deals, helping 20 smaller lenders raise $45 billion – or the equivalent of 245,000 home loans.

The need for further government investment in the sector is fading because of increased supply of capital from investors seeking stable yields, as well as the weakest demand for home loans in two decades. About $8.5 billion in RMBS has been issued this year without government support, more than half the total issuance last year.

In 2008, when the US housing collapse triggered a global aversion to riskier assets, private investors were buying only 24 per cent of RMBS deals in the market. Now they are buying the lot, according to Mr Swan.

“The RMBS market is now functioning well and has actually had its best first quarter of issuance since 2007," Mr Swan will tell a conference in Sydney.

He will say the changes don’t mean the government will sell down its existing stock of RMBS soon. “The AOFM will continue to manage our holdings as usual, including assisting price discovery from time to time as required."

Mr Swan will claim credit for acting early in Labor’s first term – well before the crisis struck – to prepare a financial claims scheme to protect depositors.

“If we hadn’t moved early through the first half of 2008 to get the legislation ready, it is not clear we would have been able to move so swiftly to secure deposits as troubles hit," he will say.

“Five years on from the darkest days of the global financial crisis, it’s not surprising we’ve talked less about the strength of our financial system."